UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ______ TO ______
Commission File Number 000-21750
PrimeSource Corporation
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1430030
- ------------ ----------
(State of incorporation) (I.R.S. Employer
Identification No.)
4350 Haddonfield Road, Suite 222, Pennsauken, NJ 08109
- -------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(609) 488-4888
--------------
(Registrant's telephone number, including area code)
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class Outstanding at May 7, 1999
- ----- --------------------------
Common stock, par value $.01 6,536,014 shares
<PAGE>
PRIMESOURCE CORPORATION
INDEX
PART I - FINANCIAL STATEMENTS
Item 1 - Financial Statements Page No.
--------
Condensed Balance Sheets
March 31, 1999 and December 31, 1998 3
Condensed Statements of Income
Three Months Ended March 31, 1999 and 1998 4
Condensed Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-k 11
SIGNATURES 12
Certain statements contained in this report are forward-looking. Such
forward-looking statements are subject to a number of factors, including
material risks, uncertainties and contingencies, which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully implement its business strategies including
successfully integrating business acquisitions, the effect of general economic
conditions and technological, competitive and other changes in the industry,
impact of year 2000 issues, as well as other risks and uncertainties as set
forth in the Company's periodic reports and other filings with the Securities
and Exchange Commission.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED BALANCE SHEETS (Unaudited)
<CAPTION>
March 31, December 31,
(Thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Receivables, net ................................... $ 94,449 $ 83,575
Inventories ........................................ 57,660 69,111
Other .............................................. 4,120 3,814
- --------------------------------------------------------------------------------
Total Current Assets ................................. 156,229 156,500
Property and equipment, net .......................... 13,048 13,123
Excess of cost over net assets
of businesses acquired, net ....................... 17,399 17,526
Other assets ......................................... 3,712 3,898
- --------------------------------------------------------------------------------
Total Assets ......................................... $190,388 $191,047
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations ........... $ 1,092 $ 1,128
Notes payable ...................................... 3,500
Accounts payable ................................... 46,064 33,745
Book overdraft ..................................... 3,241 9,195
Other accrued liabilities .......................... 6,330 8,680
- --------------------------------------------------------------------------------
Total Current Liabilities ............................ 56,727 56,248
Long-term obligations, net of current portion ........ 73,104 75,205
Accrued pension liabilities and other liabilities .... 4,005 3,983
- --------------------------------------------------------------------------------
Total Liabilities .................................... 133,836 135,436
- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value ....................... 65 65
Additional paid in capital ......................... 25,724 25,724
Retained earnings .................................. 30,763 29,822
- --------------------------------------------------------------------------------
Total Shareholders' Equity ........................... 56,552 55,611
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........... $190,388 $191,047
================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF INCOME (Unaudited)
<CAPTION>
Three Months
(Thousands of dollars, Ended March 31,
except per share amounts) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales ............................................ $ 139,434 $ 101,528
Cost of sales ........................................ 115,962 83,076
- --------------------------------------------------------------------------------
Gross profit ......................................... 23,472 18,452
Selling, general, administrative and other expenses .. 19,995 15,975
- --------------------------------------------------------------------------------
Income from operations ............................... 3,477 2,477
Interest expense ..................................... (1,432) (680)
Other income, net .................................... 53 88
- --------------------------------------------------------------------------------
Income before provision
for income taxes .................................... 2,098 1,885
Provision for income taxes ........................... 863 773
- --------------------------------------------------------------------------------
Net income ........................................... $ 1,235 $ 1,112
================================================================================
Per share of common stock:
Net income per basic and diluted share ............... $ .19 $ .17
Cash dividends ....................................... .045 .045
================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PRIMESOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Three Months Ended March 31,
(Thousands of dollars) 1999 1998
- --------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income ........................................... $ 1,235 $ 1,112
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ..................................... 537 468
Amortization ..................................... 256 93
Changes in assets and liabilities affecting operations 10,137 (631)
- --------------------------------------------------------------------------------
Net cash provided by operating activities ............ 12,165 1,042
- --------------------------------------------------------------------------------
Investing Activities:
Additions to property and equipment .................. (462) (491)
Net decrease in other assets ......................... 182 145
- --------------------------------------------------------------------------------
Net cash used in investing activities ................ (280) (346)
- --------------------------------------------------------------------------------
Financing Activities:
Net decrease in short-term debt ...................... (3,500)
Proceeds from long-term obligations .................. 31,250
Repayment of long-term obligations ................... (2,137) (26,227)
Decrease in book overdraft ........................... (5,954) (5,464)
Dividends paid ....................................... (294) (294)
Proceeds from exercise of stock options .............. 39
- --------------------------------------------------------------------------------
Net cash used in financing activities ................ (11,885) (696)
- --------------------------------------------------------------------------------
Net change in cash ................................... -- --
Cash, beginning of year .............................. -- --
- --------------------------------------------------------------------------------
Cash, end of period .................................. $ -- $ --
================================================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest ........................................ $ 1,442 $ 420
Income taxes .................................... 379 258
================================================================================
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
PRIMESOURCE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information pursuant to the rules and regulations of the Securities and Exchange
Commission and instructions to Form 10-Q. While these statements reflect all
adjustments (which consist of normal recurring accruals) which are, in the
opinion of management, necessary to a fair presentation of the results for the
interim periods presented, they do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. These statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's 1998 Annual Report on Form 10-K for further information.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
2. Inventory Pricing
Inventories consist primarily of purchased goods for sale. Inventories are
stated at the lower of cost or market. Cost is determined using the last-in,
first-out (LIFO) and first-in, first-out methods of accounting. Because the
inventory determination under the LIFO method can only be made at the end of
each fiscal year, interim financial results are based on estimated LIFO amounts
and are subject to final year-end LIFO inventory adjustments.
3. Income Per Common Share
The following is a reconciliation of the average shares of common stock used to
compute basic income per share to the shares used to compute diluted income per
share as shown on the consolidated condensed statements of income for the three
months ended March 31:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------
Average shares of common stock outstanding
<S> <C> <C>
used to compute basic earnings per share 6,536,016 6,521,084
Dilutive effect of stock options ............. 6,252 178,325
- --------------------------------------------------------------------------------
Average shares of common stock outstanding
used to compute diluted earnings per share ... 6,542,268 6,699,409
- --------------------------------------------------------------------------------
Net income per share
Basic ........................................ $.19 $.17
Diluted ...................................... .19 .17
================================================================================
</TABLE>
<PAGE>
4. Business Acquisition
In September 1998, the Company acquired the net assets of Bell Industries'
Graphic Imaging Group ("Bell acquisition") with 13 locations in the West,
Southwest and Midwest. Annual sales from this acquisition are expected to be
approximately $135 million.
5. Restructure and Other
In 1998, the Company reorganized the operations into three regions. This
included integrating the Bell acquisition operations into the applicable regions
and, where appropriate, combining Bell facilities with existing PrimeSource
facilities in the area. In conjunction with this reorganization, the Company
incurred a restructure and other expense charge of $1,050,000 of which $54,000
was expended in 1998. The following table sets forth the components of the
accrual balance at December 31, 1998 and the expenditures through March 31,
1999.
<TABLE>
<CAPTION>
Balance Balance
December 31, Cash March 31,
(Thousands of dollars) 1998 Expenditures 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee severance ............. $546 $472 $ 74
Lease obligations .............. 100 38 62
Asset write-downs .............. 350 350
- --------------------------------------------------------------------------------
Total ......................... $996 $510 $486
================================================================================
</TABLE>
6. New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes new procedures for accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. The
Statement is effective for fiscal years beginning after June 15, 1999. The
Company currently uses interest rate swap agreements ("swaps") to effectively
fix the interest rate on a portion of the Company's floating rate debt. Under
current accounting standards, no gain or loss is recognized on changes in the
fair value of these swaps. Under this statement, gains or losses will be
recognized based on changes in the fair value of the swaps which generally occur
as a result of changes in interest rates. The Company is currently evaluating
the financial impact of adoption of the Statement. The adoption is not expected
to have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
7. Reclassifications
Certain reclassifications have been made to the 1998 condensed financial
statements to conform to the 1999 presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net income for the quarter ended March 31, 1999 was $1,235,000 ($.19 per diluted
share) compared to net income of $1,112,000 ($.17 per share) for the same period
last year.
Net sales reached a new high of $139,434,000 for the quarter, 37% above the
$101,528,000 for the same quarter last year. This sales growth was due, in part,
to acquisitions completed in 1998, as well as to internal growth in all aspects
of the Company's business.
Gross profit as a percent of sales was 16.8% for the quarter ended March 31,
1999 compared to 18.2% for the same quarter last year. This decrease is the
result of changes in product mix, lower manufacturer rebates as a percent of
sales and a reduction in purchase discounts as a result of decreasing inventory
levels during the quarter.
Selling, general, administrative and other expenses as a percent of sales
decreased from 15.7% in the first quarter of 1998 to 14.3% in 1999. This
decrease reflects the cost savings from the integration of the Bell acquisition
operations and the cost reductions incurred in reorganizing the business into
three regions.
Interest expense was $1,432,000 for the quarter ended March 31, 1999 compared to
$680,000 for the same period last year. This increase is primarily attributable
to the Bell acquisition in September 1998.
The effective tax rates for the quarters ended March 31, 1998 and 1999, remained
relatively constant at 41% and 41.1%, respectively. The difference between the
effective tax rates and the federal statutory rate of 34% for both periods is
attributable to state income taxes and non-deductible expenses.
Financial Condition and Liquidity
Net cash provided by operating activities for the three months ended March 31,
1999 was $12.165,000 compared to $1,042,000 for the same period last year. This
increase is primarily attributable to improved management of working capital in
1999. Changes in assets and liabilities resulted in a $10.1 million inflow of
cash in 1999 compared to an outflow of $.6 million in 1998. Excluding the effect
of changes in assets and liabilities, the cash flow increased by 21% from
$1,673,000 to $2,028,000.
Net cash used in investing activities was $280,000 for the three months ended
March 31, 1999 compared to $346,000 for the same period last year. Capital
expenditures for the three months in 1999 were $462,000 compared to $491,000 for
the same period last year. Additional capital expenditures for the year, for
which there are no material commitments, are anticipated to be approximately
$1,500,000.
Net cash used in financing activities was $11,885,000 for the three-month period
ended March 31, 1999 compared to $696,000 for the same period last year. During
the quarter ended March 31, 1999, debt decreased $5.6 million and the book
overdraft decreased $6 million. These decreases reflect the utilization of the
cash generated from operations. For 1998, debt increased $5 million and the book
overdraft decreased $5.5 million. For both periods, dividends were $294,000.
<PAGE>
The Company's primary source of debt financing is a revolving credit agreement
with a commitment of $75 million of which $73 million was outstanding at March
31, 1999. In addition, the Company has an uncommitted credit line for $10
million with no outstanding balance at March 31, 1999. The Company believes
these facilities combined with future cash flow from operations will be adequate
to meet the ongoing capital requirements of the Company.
Procedures for the Year 2000 Issue
The Company's business system will require program modifications prior to the
year 2000 for what is commonly referred to as the "Year 2000 Issue". Similar to
other systems, the system currently abbreviates the year to a two-digit number.
As currently programmed, this abbreviation will cause many of the functions
within the system which are date sensitive to operate improperly or malfunction
in the year 2000.
The business system was initially installed in 1990. The system was acquired
from a software manufacturer and was modified to meet certain Company
requirements. Since the initial installation, the software manufacturer has made
several upgrades to the product, including making the software Year 2000
compliant. Historically, the Company has elected not to install the available
system upgrades because of the potential additional programming costs of making
any required changes to the custom modifications previously made. To become Year
2000 compliant and, in addition, to take advantage of other enhancements in the
software, the Company has decided to install the manufacturer's software
upgrades. In addition, the Company has contracted with the manufacturer to make
the necessary programming changes required as a result of the Company's separate
custom modifications to the program. The manufacturer has completed the changes
and the Company has completed the testing. In order to minimize potential
computer down time, the Company has scheduled the conversion implementation for
Memorial Day weekend (May 29-31, 1999), thus allowing for one additional
nonbusiness day to complete the process.
The Company believes it has allowed adequate time, including time for any
potential delays, to complete the project prior to the year 2000. Accordingly,
at this time, the Company has not made any formal contingency plans.
The total cost of the system improvements, which incorporate the Year 2000
compliance, are estimated to be $300,000 of which substantially all has been
expended. No other significant information system additions have been postponed
as a result of this project.
With regard to potential implications to the Company of suppliers not being Year
2000 compliant, the Company through questionnaires and direct contact with major
suppliers, is in the process of reviewing the status of their compliance. At
this time, the Company is not aware of any compliance problem with any of its
significant suppliers and, in addition, the Company has access to competing
products for nearly any customer's needs.
<PAGE>
With regard to the Company's customer base, the Company is not requesting any
specific information from its customers. The Company has over 30,000 customers
and does not feel the potential exposures justify the cost and problems
associated with surveying this customer base. The Company does share information
electronically with certain customers and is working with these customers with
regard to potential transmission problems.
The Company recognizes that some electronic equipment it sold in earlier years
may not be Year 2000 compliant and could result in claims against the Company as
well as the manufacturer of the equipment. The Company believes it would have
several defenses to any such claims, but it is unable to estimate what the
aggregate cost of defending and/or settling such claims would be.
With regard to other areas of exposure, the Company's facilities consist
primarily of leased warehouse facilities in large metropolitan areas using local
utilities. With regard to communication lines, the business system lines are
through a major supplier who has provided assurances they will be Year 2000
compliant. As the Company does not have any specific contract services with
power companies or other utilities or sophisticated production equipment, it is
not subject to many of the potential problems of manufacturing or certain
service environments. However, due to the interdependence of telecommunication,
power and other utility services and the other general uncertainties of this
issue, the Company is unable to determine whether the consequences of Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes new procedures for accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. The
Statement is effective for fiscal years beginning after June 15, 1999. The
Company currently uses interest rate swap agreements ("swaps") to effectively
fix the interest rate on a portion of the Company's floating rate debt. Under
current accounting standards, no gain or loss is recognized on changes in the
fair value of these swaps. Under this statement, gains or losses will be
recognized based on changes in the fair value of the swaps which generally occur
as a result of changes in interest rates. The Company is currently evaluating
the financial impact of adoption of the Statement. The adoption is not expected
to have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
none
b. Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the quarter
ended March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESOURCE CORPORATION
(REGISTRANT)
BY /s/ WILLIAM A. DEMARCO
William A. DeMarco
Vice President of Finance and
Chief Financial Officer
(principal financial and accounting officer)
DATE May 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 87,389
<ALLOWANCES> 3,552
<INVENTORY> 57,660
<CURRENT-ASSETS> 156,229
<PP&E> 24,566
<DEPRECIATION> 11,518
<TOTAL-ASSETS> 190,388
<CURRENT-LIABILITIES> 56,727
<BONDS> 73,104
0
0
<COMMON> 65
<OTHER-SE> 56,487
<TOTAL-LIABILITY-AND-EQUITY> 190,388
<SALES> 139,434
<TOTAL-REVENUES> 139,434
<CGS> 115,962
<TOTAL-COSTS> 115,962
<OTHER-EXPENSES> 19,878
<LOSS-PROVISION> 117
<INTEREST-EXPENSE> 1,432
<INCOME-PRETAX> 2,098
<INCOME-TAX> 863
<INCOME-CONTINUING> 1,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
